Executive financial incentives and payout policy

Jeffrey R. Brown

"Using the 2003 reduction in dividend tax rates to identify an exogenous change in the after-tax value of dividends to shareholders, we test whether the composition of executives' stock and option holdings is an important determinant of payout policy. We find that when top executives have greater stock ownership, and thus have the incentive to increase dividends for liquidity reasons, there is a significantly greater likelihood of a dividend increase following the 2003 dividend tax cut, whereas no such relation existed in the prior decade when the dividend tax rate was much higher. In contrast, executives with large holdings of stock options, whose value is negatively related to the amount of dividends paid, were less likely to increase dividends both before and after the tax change. These findings hold for dividend increases in general, as well as dividend initiations, and are...